Starting a small business requires making important financial decisions that help you plan and manage your business properly. Setting up a good chart of accounts is a large part of your business’s financial plan; it will pay dividends by allowing you to access accurate financial data with just a few clicks of a mouse, and it can be done in-house or hired out to bookkeeping services.
Setting up your chart of accounts
Your chart of accounts can be thought of as a file for all of your financial information; it lists your company’s account names and numbers and is step one in setting up your accounting system. Which accounts you decide to put in your chart of accounts depends upon your business; an inventory account is only needed for companies that sell products, and not for service businesses.
Keep the future in mind when setting up your accounts; you may not have a need for some accounts right now, but make sure your numbering system allows for lots of growth. As a new business owner, you may be the only employee; that may not always be the case. Adding payroll accounts now can keep your books clean and current later.
Use a four-digit numbering system for your chart of accounts and you will have plenty of blank numbers left for adding accounts as needed, and so that each transaction can be properly coded and added to the system. Additionally, you will be able to easily identify the type of account by its number if done correctly.
Account categories and common coding numbers
The chart of accounts will be used to journal all of the business’s transactions and there are five main categories of which accounts can belong: assets, liabilities, revenue, expenses, and owner’s equity. You are setting up your chart of accounts so that it will mirror the format of a company balance sheet.
Your asset category outlines what your company owns. Most computerized systems will start it at 1000 and list current assets first (cash, accounts receivable, inventory) and then fixed assets (buildings, equipment, vehicles), and a depreciation account that will show reductions in value of those assets.
Liabilities track what your company owes and the numbers should start at 2000 for ease of computing; add your current liabilities (accounts payable, sales tax, payroll tax, wages owed) first and then your long-term liabilities (such as mortgages.)
Owner’s equity is typically coded as a 3000 series of numbers and denotes the owner’s investment in the business. Later, you might have investors and need accounts for stock and retained earnings for profit that is reinvested into the company.
Revenue accounts are typically the 4000 series and show sales revenues and other income for your business. You typically need an account for discount, and one for sales returns and allowances as well. There will also be interest income, costs of goods sold, and accounts for shipping and other costs in this block of accounts.
Expenses are the final category and should be coded with numbers in the 5000 series; many people use the IRS Schedule C tax form to set up this category. Your bookkeeper and any outsourced accounting services or tax preparers will be happy about this, as it makes it much easier at tax time.
That is really all there is to it, though the task may at first seem daunting. This chart of accounts will keep your books clean and your data quick at hand whenever you need it. Outsourced bookkeeping services can help keep you on track and your expenses and other transactions coded perfectly if your chart of accounts is clean and easy to use.
Looking for more information on outsourcing accounting services? We can help you figure it all out.